Three SBI Mutual Fund schemes radically changed, investors stranded

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Most fund houses in India are making tweaks and alterations to their schemes to fit them into the categories laid down by SEBI as per its new fund classification plan announced in October 2017. The bulk of these alterations are technical and do not completely change one scheme into a totally different one. However, this is not the case with three scheme change proposals made by SBI Mutual Fund.

Technically, investors can exit these schemes without paying any exit load before 15th May 2018. However, an exit also triggers a tax consequence. In case of debt funds, investors may have to pay taxes as high as 30% (highest slab rate) simply because the fund house as made the scheme a wholly different one from the one they signed up for. We have emailed SBI Mutual Fund for their comments, and we will update this article when they send their comments.

This scheme, which currently has an average maturity of just 1.8 years, will be mandated to keep an average portfolio maturity of 10 years.

This scheme could previously invest 0-100% of its assets in central and state government securities without any specification on maturity. It must now invest 80-100% of its assets in government securities such that the portfolio’s average maturity is around 10 years. The scheme’s benchmark will also change from the I-sec Si-BEX to the Crisil 10 year Gilt Index.

Thus investors who signed up for a short-dated gilt fund with low-interest rate risk will suddenly be swept into a long-dated gilt fund with much higher interest rate risk. They can leave, but they will have to pay tax.

SBI Treasury Fund will become SBI PSU Debt Fund (AUM Rs 2,175 crore)

This scheme, which invests in short-dated paper with no focus on a particular issuer, will become SBI PSU Debt Fund. The new scheme will be mandated to invest the bulk of its portfolio in PSU debt.

The fund could earlier invest 0-50% of its assets in money market securities with residual maturity up to 1 year and 0-50% in government and corporate debt (without any specifications). It must now invest 80-100% of its assets in debt issued by Public Sector Units, Banks, Public Finance Institutions and Municipal Bodies. It can invest 0-20% of its assets in other types of debt.

Investors who thought they were buying into a short-term debt fund with no particular preference for public sector debt will find themselves part of a public sector debt fund. The restrictions on debt maturity will also go, potentially subjecting them to much higher interest rate risks.

Moving out, as explained above will only be free of exit load till 15th May. It will also result in a tax implication, for no fault of the investor.

The scheme, which is currently mandated to invest the bulk of its assets in floating rate debt, will transform into a multi-asset fund, free to move between equity, debt and gold in virtually any proportion.

This scheme can currently invest 0-15% of its assets in equities, 85-100% in debt (of which 65-100% in floating rate debt) and 0-20% in fixed rate debt or money market instruments. After the change, it will be able to invest 10-80% in either equities, debt or gold. The fund’s benchmark has also changed from the CRISIL MIP Blended Index to an equal combination of the Nifty, gold price and CRISIL composite bond Index.

In other words, investors who signed up for a relatively low risk floating rate debt fund will now find themselves part of a multi-asset fund that can have as much as 80% of its assets in equities or gold.

These radical transformations leave investors with a hard choice. Either they must accept being part of completely different funds from the ones they invested in or go through the inconvenience of an exit and pay the tax that can go up to the highest tax slab. You can find more details about these changes in an SBI notification here.